Audit and Assurance news

The IAASB in collaboration with IFAC have announced a webinar series, which will take a deep dive into aspects of the IAASB’s International Standard on Quality Management 1, Quality Management for Firms that Perform Audits or Reviews of Financial Statements, or Other Assurance or Related Services Engagements.

The Financial Reporting Council (FRC) has today issued a revision of its UK auditing standard on the responsibilities of auditors relating to fraud - ISA (UK) 240 (Revised May 2021) - The Auditor's responsibilities Relating to Fraud in an Audit of Financial Statements.   The revisions to the standard are designed to provide increased clarity as to the auditor's obligations, addressing the concern raised by Sir Donald Brydon in his review of the quality and effectiveness of audit. The revisions include enhancements to the requirements for the identification and assessment of risk of material misstatement due to fraud and the procedures to respond to those risks.   The revised UK standard is effective for audits of periods beginning on or after 15 December 2021 with early adoption permitted.

The Financial Reporting Council has issued revised International Standard for Review Engagement (UK) 2410 (ISRE (UK) 2410) Review of Interim Financial Information Performed by the Independent Auditor of the Entity. The revised standard provides additional clarity on auditor responsibilities, strengthens the review procedures required on management’s going concern assessment and strengthens reporting requirements in relation to going concern.  This ISRE (UK) is effective for reviews of interim financial information for periods commencing on or after 15th December 2021. Early adoption is permitted.

The Financial Reporting Council (FRC) has published a Thematic Briefing: The audit of cash flow statements. The briefing document highlights the results of the FRC's Constructive Engagement key findings and the steps taken by audit firms to strengthen the audit of cash flow statements. The cash flow statement provides users of the financial statements with an understanding of the generation, availability, and use of cash, and in supporting analysis of future expectations. The cash flow statement is a primary statement, but it does not always get the necessary amount of audit input as other primary statements.  As the cash flow statement movements are linked to other audited primary financial statements, this can manifest itself in the amount of audit work performed not being sufficient to reach an appropriate audit opinion or to identify matters that should be corrected/reported to those charged with governance. A common root cause is: • Internal consistency checks by the audit team across the financial statements are not picking up basic errors in the cash flow statement. This may also result in classification errors between sections of the cash flow statement. Other root causes include: • The audit team did not always adequately challenge management on the accounting policies applied and disclosures made affecting the cash flow statement. • Guidance available to the audit team to deal with technical and complex judgements was not always sufficient or embedded through staff awareness methods and training. • The review process did not always identify and adequately respond to matters identified in the audit. • The use of spreadsheets and the manual nature of cash flow workings by companies increases the complexity of auditing the consolidated cash flow statement. 

Technical Release 01/2021 Reporting to Third Parties, Guidance for Accountants, was issued in April 2021. Accountants are often asked by their clients to sign reports that have been requested by parties with whom the client has a relationship (Third Parties). Often these reports (or standard forms) are not suitable for the accountant to sign and contain language and assurances that are not appropriate. The accountant may be able to carry out an assurance engagement (reasonable assurance or limited assurance) or an agreed-upon-procedures engagement and provide the client with a report which will meet the needs of the third party. This Technical Release TR 01/2021 aims to provide a “roadmap” to relevant international standards and supporting materials that are available to accountants when delivering assurance, agreed-upon procedures or advisory engagements.  Miscellaneous Technical Statement M39 Reporting to Third Parties has been withdrawn. All our Technical Releases can be accessed on our website.

Since the outbreak of Covid-19, there have been huge challenges for many businesses, with accountants playing a critical role in helping them navigate the uncertainties. Amongst this disruption, one significant change which may have slipped off some businesses’ radar is the discontinuation of LIBOR (the London Interbank Offered Rate), and deadlines are imminent. As you are probably aware, public authorities globally have announced that LIBOR, a series of benchmark reference rates used for calculating interest rates for financial products, is no longer sustainable and the market should move to robust alternative rates. In the UK, the Bank of England and the Financial Conduct Authority (FCA) have set out the need for this transition, and from April 2021 lenders will no longer be able to offer new sterling loans linked to LIBOR, and any existing LIBOR based loans will need to be switched by 31 December 2021. This will affect a significant proportion of British businesses in some way. LIBOR is found in commercial loans, leasing and servicing contracts, discount rates used in valuations and company pension schemes. The transition will have implications ranging from the way businesses finance themselves, to potential impacts on accounting systems and tax. Many businesses may now need support in understanding how the transition could affect the payment or receipt of interest after the end of 2021, the legal position of a new contract, and the nature and impact of the new alternative rates. Replacements for LIBOR will be quite differently constructed. For example, the main alternative rate that may be used to replace LIBOR, particularly for medium to large businesses, is SONIA (Sterling Overnight Index Average). Whilst LIBOR is available as a forward-looking term rate for different tenors, for example one month, or three months, SONIA is a backward-looking overnight rate. For smaller businesses, other rates such as Bank of England Base Rate may be offered, but this too is constructed differently to LIBOR. For example, unlike LIBOR, it does not include any term bank credit risk or liquidity premium. The practical challenges when taking out new lending on alternative rates to LIBOR or transitioning existing contracts, are not insignificant. Additionally, lenders are now starting to contact clients to discuss contracts and new rates, so businesses need to be prepared. To help with this preparation, ICAEW and UK Finance, working alongside the CBI, ACT and LMA, have developed a new simple introductory guide which can be given to clients and also used by any accountants or advisers of businesses who are not yet familiar with the transition. The guide sets out what is happening, helps businesses understand if it affects them, what they need to do and where they can go for further information. Accountants and advisers have a very important role at the centre of this transition and can help secure the best outcomes for businesses and clients. Now is the time for both accountants and businesses to put LIBOR on their list of priorities for 2021. For more information, please visit the Institute of Chartered Accountants in England and Wales’ webpage on LIBOR transition or in addition to its introductory guide, please also see UK Finance's detailed guide on the discontinuation of LIBOR.